Edited version of private ruling

Authorisation Number: 1011533387986

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Ruling

Subject: Foreign lump sum payment

1. Is the foreign product a superannuation fund for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

2. Is the increase in value of your interest in a non resident trust included in your assessable income?

Yes.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

You were born in country A and migrated to Australia.

You worked for a company in country A (the employer) and were transferred to the same company in Australia.

You became a member of a plan which is an employer sponsored fund in country A.

You ceased employment and the employer sponsored fund in country A paid out the accumulated balance of to your client.

Your date of birth is in the 1960's.

You are a resident of Australia.

This ruling is given on the basis of the facts stated in the description of the scheme as set out above. Any material variation from these facts (including any matters not stated in the description above and any departure from these facts) will mean that the ruling will have no effect. No entity will then be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described.

Relevant legislative provisions:

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 23AK.

Income Tax Assessment Act 1936 subsection 23AK(2)

Income Tax Assessment Act 1936 section 96A

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1936 paragraph 99B(2)(a)

Income Tax Assessment Act 1936 paragraph 99B(2)(b)

Income Tax Assessment Act 1936 paragraph 99B(2)(c)

Income Tax Assessment Act 1936 subsection 170(1)

Income Tax Assessment Act 1936 subsection 481(1)

Income Tax Assessment Act 1936 subsection 483(2)

Income Tax Assessment Act 1936 subsection 481(3)

Income Tax Assessment Act 1936 paragraph 481(3)(a)

Income Tax Assessment Act 1936 paragraph 481(3)(b)

Income Tax Assessment Act 1936 subsection 485(3)

Income Tax Assessment Act 1936 section 486

Income Tax Assessment Act 1936 subsection 515(1)

Income Tax Assessment Act 1936 subsection 515(2)

Income Tax Assessment Act 1936 section 519

Income Tax Assessment Act 1936 section 529

Income Tax Assessment Act 1936 section 530(1).

Income Tax Assessment Act 1936 sections 532.

Income Tax Assessment Act 1936 sections 533.

Income Tax Assessment Act 1936 subsection 605(2)

Income Tax Assessment Act 1936 section 613

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 subsection 6-10(4)

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 subsection 305-70(1).

Income Tax Assessment Act 1997 subsection 305-70(2).

Income Tax Assessment Act 1997 subsection 305-75(2).

Income Tax Assessment Act 1997 subsection 305-75(3).

Income Tax Assessment Act 1997 subsection 295-95(2).

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1997 subsection 995-1(1).

Superannuation Industry (Supervision) Act 1993 section 10.

Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision

Summary

The payment from country A is not assessable under subsection 305-70(2) of the ITAA 1997 as it is considered that the payment is not being made from a foreign superannuation fund.

Detailed reasoning

Lump sum payments from foreign superannuation funds

From 1 July 2007 the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that is received more than six months after a person has become an Australian resident will be assessable under section 305-70(1) of the ITAA 1997. The applicable fund earnings is subject to tax at the person's marginal rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings is the amount worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

Before determining whether an amount is assessable under subsection 305-70(2) of the ITAA 1997, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund then subsection 305-70(2) will not have any application.

Foreign superannuation fund

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as follows:

(a) a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

(b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

Subsection 295-95(2) of the ITAA 1997 defines Australian superannuation fund as follows:

A superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

(a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

(b) at that time, the central management and control of the fund is ordinarily in Australia; and

(c) at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

(i) the total market value of the fund's assets attributable to superannuation interests held by active members; or

(ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

is attributable to superannuation interests held by active members who are Australian residents.

Thus, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would qualify as a foreign superannuation fund. The fact that some of its members may be Australian residents would not necessarily alter this.

Subsection 995-1(1) of the ITAA 1997, defines a superannuation fund as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), that is:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme;

Provident, benefit, superannuation or retirement fund

The High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 (Scott). In that case, Justice Windeyer stated:

… I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income there from being capitalised. I do not put this forward as a definition, but rather as a general description.

The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony). In that case, Justice Kitto held that a fund had to exclusively be a 'provident, benefit or superannuation fund' and that 'connoted a purpose narrower than the purpose of conferring benefits in a completely general sense…'. This narrower purpose meant that the benefits had to be 'characterised by some specific future purpose' such as the example given by Justice Kitto of a funeral benefit.

Furthermore, Justice Kitto's judgement indicated that a fund does not satisfy any of the three provisions, that is, 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

In section 62 of the SIS Act, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the following events occur:

· on or after retirement from gainful employment; or

· attaining a prescribed age; and

· on the member's death. (This may require the benefits being passed on to a member's dependants or legal representative).

Though section 62 of the SIS Act also allows a superannuation fund to provide benefits for 'ancillary purposes', such as, benefits paid on the termination of employment in the event of ill-health and benefits for dependants following the death of a member after retirement or attaining the prescribed age, it should be noted that they do not extend to general or non-retirement purposes such as education, home purchases or medical expenses and so on.

Notwithstanding the SIS Act applies only to 'regulated superannuation funds', as defined in section 19 of the SIS Act, and foreign superannuation funds do not qualify as regulated superannuation funds, as they are established and operate outside Australia, the Commissioner views the SIS Act (and its regulations) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide.

In view of the legislation and the decisions made in Scott and Mahony, the Commissioner's view is that for a fund to be classified as a superannuation fund, it must exclusively provide a narrow range of benefits that are characterised by some specific future purpose. That is, the payment of superannuation benefits upon retirement, invalidity or death of the individual or as specified under the SIS Act.

Therefore, notwithstanding the fact that a foreign superannuation fund may possess some features for the provision of funds in retirement, the Commissioner considers such a fund as not being a superannuation fund for Australian tax purposes if the fund contains provisions for pre-retirement withdrawals.

In order for for the fund to be considered a foreign superannuation fund as defined in section 995-1(1) of the ITAA 1997 it must satisfy the requirements set out in subsection 295-95(2) of the ITAA 1997. This means that it should not be an Australian superannuation fund as defined in that subsection.

The fund must also satisfy section 10 of the SIS Act. As noted earlier, it must be a provident, benefit, superannuation or retirement fund.

Although some of the requirements are met (such as being established outside of Australia and central management and control being outside of Australia), the requirement that the fund be a provident, benefit, superannuation or retirement fund is not. The reason for this is that in the particular plan of the members can withdraw their benefits before reaching retirement age.

The above is supported by the Benefit Payment Request form. Section D: Fund withdrawal tax information, item 2 states:

I am ceasing employment with this employer and in the previous 2 years the level of employer contributions have not increased by 50% or more.

It is evident from the above that your client's benefit was paid because they ceased employment with the employer. Your client was under 55 years of age at the time of termination of their employment with the employer therefore the benefit was not paid because they reached retirement age. Accordingly, your client's early withdrawal of their benefit from the fund does not fit the conditions established in the sole purpose test. In other words the fund provides for the payment of benefits 'for any other reason whatsoever' and not solely (that is, exclusively) for retirement purposes.

Therefore, the fund is not a foreign superannuation fund for the purposes of the ITAA 1997. Consequently, the payment from T to your client is not assessable under section 305-70 of the ITAA 1997 as it is considered that the payment is not being made from a foreign superannuation fund.

Assessability of the increase in value of T

The assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(4) of the ITAA 1997).

'Ordinary income' is defined to mean income according to ordinary concepts (subsection 6-5(1) of the ITAA 1997).

'Statutory income' is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists those provisions. Included in that list is FIF income under section 529 of the Income Tax Assessment Act 1936 (ITAA 1936) and property applied for the benefit of beneficiaries under section 99B of the ITAA 1936.

Application of the FIF measures

Subsection 481(1) of the ITAA 1936 defines an entity to be a FIF if it is a foreign company or a foreign trust. Subsection 481(3) of the ITAA 1936 defines a foreign trust as follows:

A trust is a foreign trust at a particular time if:

· at that time the trust is neither an Australian trust nor a resident Part IX

· entity, and

· the trust did not result from:

o a Will, a codicil or an order of a court that varied or modified the provisions of a Will or a codicil, or

o an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate.

Generally superannuation funds are trusts. Therefore, paragraph 481(3)(a) of the ITAA 1936 is satisfied in that T is not an Australian resident trust. Also, the exclusions in paragraph 481(3)(b) of the ITAA 1936 do not apply.

An interest in a FIF that is a foreign trust

An interest in a FIF that is a foreign trust is:

· an interest in the capital or income of the trust - including a unit in a unit trust, or

· a legal document that confers an entitlement to acquire such an interest including an entitlement arising from an option or convertible note (subsection 483(2) of the ITAA 1936).

In your case, the trustee of the fund held the income and capital in trust for you. Therefore, you have an interest in a foreign trust that satisfies the requirements of an interest in a FIF under subsection 483(2) of the ITAA 1936.

Interests in a FIF subject to the FIF measures

Section 529 of the ITAA 1936 is the operative provision of the FIF measures. It includes accrued FIF income in a taxpayer's assessable income, in relation to a notional accounting period of a FIF, for the year of income in which that notional accounting period ended.

The FIF measures apply to your interest in a FIF for the notional accounting period of the FIF that ended in your income year if:

· you had an interest in that FIF at the end of the income year, and

· you were a resident of Australia at any time in that income year (subsection 485(3) of the ITAA 1936).

The notional accounting period of a FIF will generally be 1 July to 30 June unless you elect to use another notional accounting period (section 486 of the ITAA 1936).

The measures do not apply to an interest in a FIF if you dispose of that interest on or before 30 June.

In your case, in the 2004-05 to 2007-08 income years inclusive, you had an interest in the fund and were a resident. Consequently, the FIF measures may be applicable to your interest in the fund for those income years.

However, during the 2008-09 income year you withdrew all your funds from the fund and no longer had an interest in it at the end of that income year. Therefore, the FIF measures will not apply. Instead, the normal provision of the tax legislation may apply to the interest, for example, the trust provisions.

The FIF measures on your interest in the fund in the previous years will affect the assessability of your interest under the other tax legislation in the 2008-09 income year. Therefore, it is important to determine whether your interest satisfies the exemption provisions.

Exemption from FIF taxation

There are a large number of exemptions from attribution under the FIF measures and the ones that are relevant in your case are summarised below.

Small investor exemption

The small investor exemption is available under subsection 515(1) of the ITAA 1936. This exemption applies to exclude a taxpayer (who is a natural person) from FIF taxation that would otherwise be taken to accrue from a FIF if the value of the interests of the taxpayer and that of any associates (for example the taxpayer's spouse) in FIF's were $50,000 or less at the end of the income year.

Subsection 515(2) of the ITAA 1936 sets out the rules for working out the value of the FIF. It provides that for the purposes of calculating the $50,000 exemption, the person's interest in a FIF is the cost incurred by the person in acquiring that interest or the market value of the interest at the end of the year of income, whichever is the greater amount.

In your case, the small investor exemption does not apply as the value of your interest in the investment fund at the end of each income year exceeds $50,000.

Employer-sponsored superannuation funds

Exemption for employer sponsored foreign superannuation is available to you if you are a natural person with an interest in a FIF that is an employer-sponsored superannuation fund. The FIF must be a superannuation fund maintained by your employer, or an associate of your employer, for the benefit of their employees. In addition, you must be an employee or former employee of the employer (section 519 of the ITAA 1936).

It is considered that the fund is not a superannuation fund as defined under subsection 6(1) of the ITAA 1936. Accordingly, the exemption for employer sponsored superannuation funds is not available.

Methods of taxation

There are three methods that can be used to determine the FIF income that has accrued to you in a particular income year. These are:

1. the market value method

2. the deemed rate of return method

3. the calculation method.

The market value method basically works out the movement in market value of the FIF interest between two annual reporting dates. It is expected that the majority of taxpayers who will be liable to tax under the FIF measures will use the market value method to work out the FIF income to include in their assessable income.

The deemed rate of return method basically works out the movement in value of the FIF by applying the deemed rate of return to the opening value of the FIF at the beginning of the notional accounting period.

You would use the deemed rate of return method only when you are unable to establish a market value for your FIF interest and you have not elected to use the calculation method.

You may use the calculation method if you have access to the financial accounts of the FIF and are able to determine your share of the FIF's calculated profit or calculated loss. The calculation method uses a simplified version of our taxation law to work out the profit of your FIF that is then attributed to you and included in your assessable income.

More information on the methods of FIF taxation is available in chapter 4 of the Foreign investment funds guide 2009-10 which is available from the Tax Office website at www.ato.gov.au. In it are also worksheets to assist you in working out the assessable income under the FIF measures.

Where an amount is worked out in accordance with one of the above methods and included in your assessable income as FIF income or loss, no amounts are included in your assessable income under the general trust provisions, that is your share of the trust income does not have to be shown, only the FIF income (sections 96A and 97 of the ITAA 1936).

Attribution accounts

Attribution accounts enable you to keep track of amounts attributed to you under the FIF measures and amounts distributed to you from the FIF out of those attributed amounts. You must maintain attribution accounts if you wish to prevent double taxation under the FIF measures.

FIF attribution accounts record the income attributed or distributed to you from each of your interests in a FIF or foreign life policy (FLP). They allow you to claim exemptions for FIF income previously attributed to you, for example where, after being subject to FIF taxation under the FIF measures, you later:

· receive a distribution of income or gains from a FIF or FLP (section 23AK of the ITAA 1936)

· dispose of the interest in a FIF or FLP (section 613 of the ITAA 1936), or

· use a FIF loss to reduce assessable income (sections 532 and 533 of the ITAA 1936).

Attribution accounts operate on the basis of credits and debits. In the FIF measures, a credit is referred to as a FIF attribution credit and a debit is referred to as a FIF attribution debit.

Your FIF will have a FIF attribution credit recorded in its attribution account if an amount of FIF income is included in your assessable income under the FIF measures under the operative provision.

The amount of FIF attribution credit is equal to the amount included in your assessable income or the amount of the FIF attribution debit, which arises for the FIF attribution account entity making the distribution (subsection 605(2) of the ITAA 1936).

You will record a FIF attribution debit when the FIF in which you have an interest makes a distribution to you. Debits trace the movements of profits included in your assessable income under the FIF measures and prevent that income, where it has been attributed to you, from being taxed again.

Trust distribution

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year receives a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary. When an amount is distributed to the beneficiary, subsection 99B(1) of the ITAA 1936 applies to include in the beneficiaries assessable income the distribution less any amounts excluded under subsection 99B(2) of the ITAA 1936.

Of the exclusions set out in subsection 99B(2) of the ITAA 1936 the following could apply in your case:

· the corpus of the trust (paragraph 99B(2)(a) of the ITAA 1936)

· amounts that would not have been included in the assessable income of a resident taxpayer who was presently entitled to the amounts at the time they were derived by the trust (paragraph 99B(2)(b) of the ITAA 1936), and

· amounts previously included in the beneficiaries income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA 1936).

In your case, the withdrawal made from your fund, less your contributions (the net withdrawal amount) and any amount previously included in your assessable income are assessable to you under subsection 99B(1) of the ITAA 1936.

If the FIF measures apply to you, the amount of FIF income that you are to include in your assessable income for the income years in question is reduced by an amount that the FIF distributes to you during the notional accounting period, such as an amount assessable under section 99B of the ITAA 1936 (section 530(1) of the ITAA 1936).

Section 23AK of the ITAA 1936 treats certain amounts as non-assessable non-exempt income where the amounts were previously attributed to the taxpayer under the FIF measures (subject to the exception in subsection 23AK(2) of the ITAA 1936).

In order to be able to utilise the provisions contained in section 23AK of the ITAA 1936, you will need to maintain attribution accounts as described previously.

Basically, if you have FIF income in the income years in question, the FIF income amounts will be recorded as credits in the attribution account. If your attribution account is then in surplus in the income years at the time your funds are withdrawn, the withdrawal amount will be reduced by that surplus. Only the excess over the surplus will be considered to be an assessable distribution under subsection 99B(1) of the ITAA 1936.

Foreign income tax offset (FITO)

These rules apply for income years that start on or after 1 July 2008.

Unlike the previous system of foreign tax credits (applying up to 30 June 2008), you no longer have to quarantine your foreign income into separate classes to work out the amount of the offset. All types of income are treated the same for the purposes of working out the FITO.

Whether you are eligible for a FITO on tax paid in country A on your withdrawal from the fund is dependent on the relevant double tax treaty between Australia and country A.

Under the tax treaty, the withdrawals made from the fund are taxable in Australia and may also be taxed in country A. However, the tax treaty provides relief from double taxation.

The essential requirements to allow a FITO are that:

· the taxpayer must be a resident

· the tax is foreign income tax

· you must have actually paid, or be deemed to have paid, the foreign income tax

· the income or gain on which you paid foreign income tax must be included in your assessable income in Australia.

Where an attributable taxpayer with a foreign trust FIF interest includes an amount in their assessable income under the operative provision, they can treat foreign income tax as having been paid by them on their attributed income if the operative provision amount is worked out under the calculation method.

The amount of foreign tax is the entire amount withheld in country A even though part of the withdrawal amount may be deemed to be exempt under section 23AK of the ITAA 1936, foreign income excludes that part of the withdrawal that will be exempt under section 23AK of the ITAA 1936 (section 770-10 of the ITAA 1997).

The Tax Office publication Guide to foreign income tax offset rules 2009-10 (NAT 72923) which is available on our website at www.ato.gov.au, explains what evidence you need to prove that you have paid foreign tax and how to work out your FITO.

Note

Amendment of assessments for individuals and micro business

The Commissioner may amend an assessment by making such alterations in it or additions to it as the Commissioner thinks necessary to correct the assessment. There are various time limits on his power, subject to certain exceptions.

Where there has been an avoidance of tax and the Commissioner considers that the avoidance of tax is due to fraud or evasion, he can amend the assessment to increase the taxpayer's liability at any time (subsection 170(1) of the ITAA 1936).

In any other case where there has been an avoidance of tax, the Commissioner must amend the assessment within two years after the date that tax became due and payable under the assessment (subsection 170(1) of the ITAA 1936).

In your case, it is evident that you have not declared any FIF income in respect to your FIF in prior years.

As it is not considered that fraud or evasion is involved, we are limited to amending your assessment for the 2007-08 income years as it falls within the two years.

If amendments are made to any prior year assessment a shortfall penalty and a general interest charge may be applicable.

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